Question

Explain the concept of fiduciary duty by a financial advisor. Identify the types of situations to which it applies in the field of finance. Explain the DOL fiduciary rule related to employee retirement accounts, and specifically where it now stands. Why does it matter if one’s advisor is an RIA? Be specific and state the reasons for your answers.

Answer 1

1) Consumer awareness has been increasing towards fiduciary duty by a financial advisor. Fiduciary in general means a person who has legal and ethical obligation to act on behalf of another and put user's interests in front of their own interests.

In terms of finance industry, it could mean that the advisor should be loyal to the clients explaining them all the benefits of the products, fees/commissions involved and the risks involved in the product. The recommendations provided to the client should benefit the client. This concept came into existence because financial advisors receive variable fees/commissions depending on whose product they are advising to their clients. So, naturally conflict of interest comes into play, where they can advice a product that is fetching with high commissions but is not suited to clients' interests.

2) It can come in situations where the financial advisor is giving any recommendations, say for example advising the client to buy a particular mutual fund from a specific AMC, asking the client to buy a specific insurance policy etc.

Though all fiduciary standards require financial advisors to put their clients first, there are few differences. Not all fiduciaries have to act in the interests of clients all the time nor all are enforceable by law.

3) Financial advisors are now required to educate their clients on all the various options in the product. There has been a significant shift in the functioning, where clients can leave the money where it is, move it to new plan, roll over to IRA,take out etc.

DOL is currently not actively pursuing claims against non-complying companies. However, from the long term perspective, in order to remain in the competition and stay relevant all the financial advisors will start following fiduciary rule.

4) RIA is registered investment advisor. Their fee is structured as a % of AUM. This means it aligns with the interests of client. Advisors often are faced with the temptation to trade more and get more commissions. However RIAs are typically paid for what they offer regardless of fee structure,hence are more inclined towards providing comprehensive financial advice and analysis.